Bio Rad Laboratories Inc (BIO.B) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the third quarter 2008 Bio-Rad Laboratories, Inc. earnings conference call. My name is Noelia, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be a facilitating a question and answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Ron Hutton, Bio-Rad Treasurer. Please proceed, sir.

Thank you very much. Before we begin the call, I would like to caution everyone that we'll be making forward-looking statements about management's goals, plans, and expectations. Because our actual results may differ materially from these plans and expectations, I encourage you to review our filings with the SEC, where we discuss in detail the risk factors in our business. The Company does not intend to update any forward-looking statements made during the call today.

With that, I'd like to turn the call over to Christine Tsingos, Vice President and Chief Financial Officer.

Thanks, Ron. Good afternoon, everyone. And thank you for joining us. Today, we are pleased to report quarterly net sales of $441.8 million, an increase of 30% versus the same-period last year sales of $339.7 million. This increase includes our DiaMed business, which finished the quarter at $63.5 million. Excluding DiaMed, our sales growth for the third quarter was 11.4%, while currency-neutral organic growth was 5.6%.

During the quarter, we had good growth within our diagnostics group, especially microbiology, quality control, and diabetes products. Our core life science divisions also increased with strong sales of protein expression, gene amplification, and consumable products.

The gross margin for the quarter was in line with expectations at 54.4% compared to 55% last quarter and 55.4% in the year-ago period. The third quarter reported gross margin reflects approximately $3.7 million of amortization plus an additional $2 million charge as required under purchase accounting. The gross margin for the base Bio-Rad business improved year over year to 56.2%, which can be attributed to favorable product mix as well as better manufacturing utilization in our life science business.

SG&A expenses for the third quarter were $150.5 million, or 34% of sales, compared to $117.7 million and 34.6% of sales last year. The current quarter SG&A expenses include $2 million for amortization of purchased intangibles plus the incremental DiaMed operating expenses when compared to last year. The sequential increase in SG&A margin is in line with our historical patterns and will likely increase further in the fourth quarter.

Research and development expense for Q3 was just under 9% of sales at $38.8 million. The increase from last year is primarily related to the inclusion of DiaMed as well as development of new panels for our Bio-Plex 2200 system.

During the quarter, interest and other income was a net expense of $7.7 million. This compares to $2.4 million of expense in the year-ago period, which benefited from higher interest income earned on the higher cash balances. In addition, the current quarter includes approximately $1 million of one-time expense related to the write down of a discontinued strategic investment.

The tax rate used for the third quarter was slightly higher than expected at 29%, which primarily reflects a slight reduction in the anticipated R&D tax benefit in the U.S. and France for the year 2008. Remember that last year's tax rate was unusually low, around 20% due to the favorable resolution of some outstanding audits. Excluding any future discrete events, we continue to anticipate a rate in the range of 26% to 27% in the fourth quarter.

Net income for the third quarter was $27.8 million, about flat with last year. Excluding the non-cash purchase accounting expenses, net income grew by more than 20%. The FAS 123 stock-compensation pretax expense for the quarter was $2.2 million.

Life science reported sales for the quarter grew 9.7% compared to last year to $157 million. On a currency-neutral basis, sales increased 4.4%. Excluding the decline in BSE sales, the life science currency-neutral growth for the quarter was higher at 5.7%. We continue to have good momentum in our chromatography and protein expression product line. In addition, sales of PCR instruments and reagents as well as multiplexing assays continue to gain momentum. Asia-Pacific and the emerging markets were particularly strong for life science this quarter, while the U.S. market remains somewhat challenging, especially for the higher-priced instruments.

Overall, life science segment profit was $9.3 million this quarter, up significantly from last year. This increase in profitability is primarily a reflection of improved gross margins due to a more favorable product mix coupled with lower factory costs and improved capacity.

Our clinical diagnostic group posted another strong quarter with sales of $281.4 million, a growth of more than 45% compared to last year and including $63.5 million contributed by our DiaMed business. Excluding DiaMed, diagnostic sales grew 12.7% or 6.5% on a currency-neutral basis. These sales were led by continued strong performance across all of our divisions and geographies, especially our quality controls, clinical systems, and microbiology product lines in the U.S. and Asia-Pacific.

In addition, the placement of new Bio-Plex 2200 systems and corresponding sales of tests continues to do well. We have nearly 80 placements in the field with more than 70 of those now generating revenue.

While both the growth and operating margins were negatively impacted by the $7.7 million of non-cash amortization and purchase accounting cost, clinical diagnostic segment profit for the quarter was $34.3 million compared to $24.5 million last year, a 40% increase.

With the passing of our one-year anniversary marking the acquisition of DiaMed, we can look back at the incremental success this business has brought to Bio-Rad. And we remain pleased with our integration progress to date. Remember also that with the passing of the one-year mark, we will now move into growth rates that are more typical of our industry, which are in the low to mid-single digits.

And now for a quick review of the balance sheet, as of September 30th, total cash and short-term investments were $234 million. And net cash generated from operations during the quarter was approximately $46 million.

Net capital expenditures for the quarter were $23 million, which reflects a sizable investment in our website and new e-commerce channel as well as the increased placements of the Bio-Plex 2200. Our full-year expectation for CapEx is in the low to mid $80 million range as we continue to invest in our future.

Depreciation and amortization for the quarter was relatively unchanged at $25 million.

We are pleased with our third quarter and year-to-date results, which have been in line with our expectations, despite a slowing in some of our markets, such as BSE testing, research in Japan, and capital equipment sales. As we look to the final quarter of 2008, we see many signs of continued growth and strength in our base business as well as the continuation of some of the more recent headwinds.

We have seen with prior years that the fourth quarter is generally one of our strongest in terms of revenue, but also the most challenging in terms of growth and operating margins due to product mix and year-end spending levels.

While we still expect our usual margin pressure, what is different this year is the strength of the U.S. dollar. Just since the 1st of July, we have seen the dollar strengthened by more than 20% against our major foreign currencies. For the fourth quarter alone, this new currency level effectively reduces our forecast by more than $50 million in sales and $10 million in operating income.

As such, and combined with the slow capital equipment demand, it wouldn't surprise us if fourth quarter top line growth was in the low single digits on a currency neutral basis and flat to slightly down on a reported basis when compared to last year.

Despite this change in fourth quarter expectations, for the full year, we should still be within our original guidance, which was currency-neutral growth in the mid to high single digits for the base business and high teens including DiaMed; gross margins in the 54% to 55% range; and SG&A margins flat to down from the 2007 level.

As has been our practice in prior years, we will share our thinking and outlook for 2009 in February during the fourth quarter earnings call.

And now, we're happy to take your questions.

(Operator Instructions) You have a question from the line of Jon Wood with Banc of America Securities.

Thanks. This is actually Brandon in for Jon tonight. So the minority interest line looked materially higher than what you'd been running. And it doesn't look like you've purchased, if I'm correct, the outstanding DiaMed minority piece. Can you give us a sense of what the run rate on that line it should be going forward and what the outlook is on buying the rest of the outstanding piece?

Yes, sure, Brandon. That's actually a great question. You're right. It was a little higher at $3 million this quarter. I think we've been running closer to $2 million or just under. And I think that that $2 million mark is more the appropriate run rate until we do retire the remaining shares. But during the quarter, it did bump up to three. Some of that's related to the success and profitability of the DiaMed business in and of itself, some adjustments that were made for historical changes, taxes, things like that.

But I think you're right. The $2 million is more the appropriate quarterly run rate until we tender for the remaining 10% of the shares. We're still hoping that we can achieve that before the end of the year, certainly not much longer than that if possible. Remember that even when we do tender for the remaining 10% of the shares of DiaMed holding, there will still be a small minority interest line because of subsidiaries where we own 50% or 75%, but not fully owned on the DiaMed side.

Okay. Do you expect to complete that in the fourth quarter, or -- ?

I think we would like to be able to do that. There's quite a bit of work that needs to get done for us to achieve that. But we've made good progress to date. And we're going to keep working towards that goal.

Okay. Thanks for that. The Bio-Plex placements looked tremendous in the quarter. Can you give us a sense--did that account for--I mean, is Lab Corps included in that? And has Lab Corps made a real commitment on the Bio-Plex? Are they still evaluating that?

Yes, so I'll let John answer more on the color. But let me just point out the nearly 80 is total placements that we have, not 80 placements just in Q3. But still, more than 70 of them are generating revenue now.

Right, Jon (sic), what was your other question, just--?

Yes, just we heard out in the field that Lab Corps was evaluating the Bio-Plex and in the initial stages and was just wondering if you could maybe give us a comment. Are they still evaluating it? Have they made a real commitment yet?

Yes, Brandon, this is John. Yes, I guess the short answer to that one is yes. They are in the evaluation process. We hope to have some good news along those lines in the near future.

Okay. Any update that you can give us on menu expansions, maybe before the end of the year, maybe heading into 2009, the new kits that you might expect to commercialize for the Bio-Plex?

Yes, we have a Torque IGG kit that's in the FDA right now. We hope that that'll be released here pretty soon from FDA. And that would put us in a position to launch it right at the end of the year. And then in 2009, we're looking at several panels coming forth, a lot of them in the serology area. So that's what the pipeline looks like.

Okay. On pricing, have you done any off-cycle price increases this year? Or do you plan to do an above-average price increase maybe in 2009?

What's an off-cycle price increase, just without a new--?

I mean, several other competitors in this space have taken some additional price on the regular cycles that were this quarter, some more than history. Just curious if you have taken any price if it's above normal historical annual levels, any commentary?

We have taken some price increases. This is Norman. We have put through some price increases as I think most people have. If you look at costs, especially energy-related costs and plastics, those kinds of things, the costs have drifted up. And we've tried to pass that along to customers. In some cases, I guess you could say that's partially reflected in our results. But in a lot of cases, these are longer-term commitments and contracts that we have. So those will be reflected I think in future quarters as well.

Okay. And lastly, have you seen any deterioration in the life science capital equipment trends thus far in the fourth quarter? And can you quantify what kind of--how much that impacted growth maybe in the third quarter?

Brandon, this is Brad Crutchfield. I'll take that. The answer is yes, certainly in the U.S. markets, a little bit in Europe. Capital instruments, things that are in excess of $50,000 seem to be lighter. Purchase decisions are being put off. And so we generally see that as a tightening of credit markets.

As far as the fourth--so that certainly is something we've talked about all year really. I really haven't seen it get particularly worse or change much in the last six or eight weeks. We have a pipeline for the fourth quarter that seems to be pretty much in line with where we started the year. But we'll have to see whether those come through. I mean, one thing for life sciences is that we still have a fairly diverse product line. So we have a lot of consumables and reagents. And those sort of help soften the blow as it were from a purely capital instrument play.

Okay. Great. Thanks so much.

(Operator Instructions) Your next question comes from the line of Doug Fisher with Kennedy Capital.

Yes, hi. Congratulations on another solid quarter.

Thanks, Doug.

I wondered if I could get from you if you have the number for the total purchased intangibles that were in the quarter, not just the DiaMed portion.

Well, DiaMed is the vast majority. Beyond that, you're talking about amortization. If you look at total amortization for the quarter versus the DiaMed piece, there's maybe $1 million more that's related with some historical acquisitions.

Okay. And can you talk about on the BSE side whether you have seen that start to stabilize a little bit to have headwind? It almost looks like I compare the difference between the constant currency growth rates reported and then ex-BSE that maybe that's started to flatten out a little bit here.

Yes, I'll take that. This is Brad, again. Yes, by just sheer numbers, yes, we have--the BSE business has gotten small enough that it doesn't have as much of an impact. It still is a business going away fairly dramatically. But just by the sheer size of it, it's dropped off. So obviously, its impact going forward will be less and less.

Okay. And just could you talk a little bit about fourth quarter, whether you have a feel for cash flows, what that might be or kind of ballpark where you might expect to finish up the full year?

Boy, Doug, that's just not something that we've usually talked about on a forward-looking basis because there's just so many things that can impact cash flows, both positively and negatively. And then, of course, now we're dealing with currency as well. So I don't think I want to get in a position of predicting that.

Okay. I just thought that they'd generally been relatively solid for the--in the fourth quarter in years past. But I understand what you're saying. Okay. Thank you.

And I'm showing we have no further questions at this moment.

Okay, then. Well, thank you very much for taking the time to join us today. As always, we're available for any follow-up questions you may have. Bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.